Did the G20 Agree on a New Plaza Accord in Shanghai?

A burning question that arose in the aftermath of the February 2016 G20 meetings in Shanghai is whether the G20 members secretly instituted a "Plaza Accord" agreement to intervene and stem the rise of the U.S. dollar, and perhaps even to reverse its overall trend from the upside to the downside versus other major world currencies.

"Plaza Accord" refers to an agreement made at the Plaza Hotel in 1985, between the United States and its primary economic allies, to engage in massive selling of the dollar in the foreign exchange market at a time when the dollar had skyrocketed in value against other currencies. At the time, the U.S. dollar index (USDX) versus major currencies had soared from under 100 to nearly 150 in the space of just a few years.

The Plaza Accord was the first major, internationally-coordinated currency intervention since the abandonment of the gold standard in 1971 in favor of fiat money, currencies that are not backed by any physical commodity such as gold or silver, and lack any intrinsic value. Following the Plaza agreement, the U.S. dollar declined 40% over the next three years.

The Dollar's Recent Bull Run

The U.S. dollar has been on a tear versus most other major currencies since mid-2014 when the dollar index reached a low around 79. Since then, it has risen to a high just above 100, scored in late 2015. In June 2014, GBP/USD stood at 1.7191; as of May 2016 it is down to 1.4527. EUR/USD fell from a 2014 high of 1.3993 to 1.1134 in May 2016. Even though the Chinese yuan remains officially pegged to the U.S. dollar, the yuan has depreciated almost 7% against the dollar in less than a year. Overall since 2011, the U.S. dollar has risen more than 30% versus major currencies.

Part of what leads analysts to suspect that some sort of agreement on currency policy may have been crafted at the Shanghai meetings is the belief that a continuing rise of the U.S. dollar against, specifically, the yen and the euro may have negative effects on the global economy as a whole. Additionally, a stable U.S. dollar is seen as one key component in reducing any financial pressure that China policymakers may be feeling to initiate a further significant devaluation of the yuan.

The Nature of a Possible Accord

Joachim Fels, global economic advisor at Pacific Investment Management Company (PIMCO), thinks that at least an informal, tacit agreement may have been reached in Shanghai between the heads of state and central bankers from the G20 economies. In Fels' opinion, such an agreement is likely one to stifle the dollar's advance primarily by using monetary policy rather than by means of active intervention in the form of selling the dollar in the forex market.

As evidence of such an agreement, Fels and other analysts point out that, after the G20 summit, officials from China, Japan, the European Union, the United Kingdom and, finally, the U.S. have all made policy moves designed to stabilize the overall economy and currency markets. China's central bank eased its reserve ratio requirement by 50 basis points, and the European Central Bank (ECB) shifted its focus to credit markets. The U.S. Federal Reserve Bank finished up the round of central bank statements and actions by announcing a likely slower rise in interest rates. Fed Chairman Janet Yellen explained the more cautious policy with references to global economic risk and the recent volatility in equity markets.

There are plenty of analysts who are skeptical of any Plaza-type accord having been made. Julian Jessop, global economist at research firm Capital Economics, argues that neither the Bank of Japan (BOJ) nor the ECB would see an advantage in their currencies appreciating against the U.S. dollar.

The February meetings in Shanghai concluded with G20 officials openly pledging, for the first time in history, to maintain close communications in regard to currency exchange rates.

Market Action Following the G20 Meeting

Whether or not any agreement was reached in Shanghai to reverse the dollar's bull run, market action since the summit has been characterized by a notable decline in the dollar. Following the conclusion of the G20 meetings, the dollar index fell from 98 to 92, although it recovered some of that ground to trade around 95 to 96 in late May 2016. In contrast, both the yen and the euro have enjoyed rallies. It's unlikely that the G20 group actually wants to see a major U.S. dollar sell-off. A more probable goal is simply stabilization and putting something of a cap on the dollar's rise.

The recent market action may reflect a sort of self-fulfilling prophecy, a reluctance on the part of forex traders to buy the dollar if they fear that central banks may be making a concerted effort to sell short. If it influences traders to favor the short side against the dollar, then just the rumor of a possible agreement may be sufficient to prevent the dollar from advancing significantly higher.